German deal on revaluing gold after climbdown by government

THE German government and the Bundesbank were close to resolving their dispute over a plan to revalue the country's gold reserves, last night. They agreed to postpone the transfer of profits from the revaluation until next year.

The compromise, which represents a humiliating climbdown for the government, would mean that the revaluation could not be used to help Germany qualify for entry to Economic and Monetary Union (EMU).

Germany's finance ministry last night denied reports that a deal had already been agreed between the Finance Minister, Mr Theo Waigel, and the Bundesbank president, Mr Hans Tietmeyer, but admitted that a resolution was close.

"There has been no final agreement reached today. Mr Waigel said he and Mr Tietmeyer are on their way to reaching a solution. Reports that a deal has been made are false," a spokesperson said.

The gold revaluation plan provoked outrage within Germany and abroad and raised suspicions that Bonn was willing to use creative accounting to qualify for EMU. When the Bundesbank rejected the scheme last week, some members of the Christian Democrats in government threatened to rebel.

Mr Waigel is due to address the Bundes-tag on the issue today but postponing the transfer of profits would mean that he would not need to change the Bundesbank law, a move that requires the approval of parliament.

Germany owns 95 million ounces of gold, which the Bundesbank currently values at DM144 an ounce. The revaluation would bring that figure closer to the market price of approximately DM580. Mr Waigel wants to use the profits to offset debts incurred by the former East Germany, a move that would reduce Bonn's public debt and, through sayings on interest payments, its budget deficit.

Abandoning the plan would leave a DM10 billion hole in this year's budget, making it almost impossible for Bonn to keep its budget deficit below the 3 per cent target laid down in the Maastricht Treaty.

The return of a Socialist government in Paris makes it unlikely that France will reach the Maastricht criteria either, suggesting that the conditions of entry must be weakened if the euro is to be launched as planned in January 1999.

Yesterday's resolution of the gold row followed a meeting of Germany's three governing parties which failed to agree on measures to fill a huge gap in next year's budget.

Record unemployment has reduced the tax yield and increased social security payments, leaving Mr Waigel DM15 billion short next year, even if he introduces a raft of privatisations.

The liberal Free Democrats (FDP), the smallest party in the centre-right coalition, refuse to countenance any tax increases and have threatened to walk out of government if a planned tax cut is deferred. But Mr Waigel has little scope for public spending cuts with an election looming next year and a buoyant opposition scenting blood.

Chancellor Helmut Kohl hopes to win a clear mandate in next year's election for his most cherished political aims - European integration and restructuring the German economy. The opposition Social Democrats acknowledged yesterday that the government was unlikely to fall before it completes its term late next year.

But the success of left-wing parties in Britain and France and the increasingly chaotic performance of Dr Kohl's government have convinced many Social Democrats that victory is within their grasp.